Ourview | Sovereign fund strategy

Ourview | Sovereign fund strategy

The government recently tossed up the idea of becoming a direct overseas investor by setting up a sovereign wealth fund. The strongest argument in support of this is that the country imports 80% of its oil needs. There is, therefore, an overwhelming need to acquire oil and gas assets overseas to boost energy security. This task is not easy since it requires the kind of resources that are often beyond the scope of individual companies. Further, although the country has sizeable coal resources, these remain largely unexploited as the free sale of the fuel by private mining companies is prohibited—a law that has created a public sector near-monopoly, Coal India Ltd.

The reasoning is flawed because a clear understanding of energy security as a concept seems to elude the government. If the objective is to secure assets in an attempt to lower energy costs, then it is entirely misplaced, especially so since we can fairly assume that public sector companies will drive any such initiative to spend public money. Here’s why: Key to a profitable property purchase lies in two skills—first, the ability to correctly assess reserves well beyond what the market estimates in the case of discovered fields; second, to explore the property and discover new finds.

In both these aspects, state-owned oil exploration companies ONGC Ltd and Oil India Ltd have a poor, if not disastrous, record on home turf. ONGC, the bigger of the two, has not brought on stream any major production in the last two decades. Worse, ONGC’s most expensive purchase, that of Imperial Energy Plc for $2.2 billion in early 2009, has proven to be a financial disaster. Production in its Russian oil fields has dropped to less than half the original estimates.

The other element of energy security is also not fulfilled in this case—that of supply security. In the rare event of supply disruptions (there was a threat of this happening during the Iraq war), volumes are essential. More importantly, supply security is about the country’s ability to offer safe passage for tankers laden with oil. This has a lot to do with tactful diplomatic engagements supported by a strong naval fleet, which can be achieved even without physically owning the property.

In the case of coal, the government is addressing the issue of its shortages from the wrong end. The answer lies in allowing open sale of coal mined by private companies.

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